Sunday, October 30, 2016

There is plenty of hand-wringing this weekend about what’s wrong with ESPN after reports that it it is having its worst-ever month, losing 621,000 subscribers between October and November. It’s a decline in sports as entertainment, according to Clay Travis at Outkick the Coverage, who points out that the decline in viewers and subscription fees could put not just the cable channel in a financially untenable situation, but also many of the team sports leagues that it broadcasts. There is plenty of separate evidence for the decline of sports television this year. The NFL saw an unexplained swoon in ratings this fall, and the month before, the summer Olympics had its biggest-ever decline in TV audience.

But ESPN is just one of the most successful TV channels on cable. The decline in cable is a trend hitting all cable channels. Tyler Durden writing at ZeroHedge puts the blame on HBO, which launched its online HBO Now subscription model less than a year, taking 1 million customers away from cable. The numbers don’t quite add up when you look closer. ESPN has lost 2 million subscribers in the last year, so the 1 million HBO Now subscribers so far don’t come close to accounting for the decline in cable and ESPN. Nevertheless there is something to this theory. The move by HBO and others to offer content on the Internet must have helped break the habit of premium cable subscriptions. TV subscriptions, like banking relationships, tend to be very slow to change. Five years can pass by between “I’m really paying too much for this” and the actions that actually terminate the subscription. Many people don’t get around to canceling until they realize they are moving, forcing a change whether they are ready or not. When a service has this much inertia, it is a healthy approximation to say that customers who finally break their habit are lost forever. In other words, after the 2 million subscribers lost this year, there will be at least as many more next year, and there is probably nothing the TV industry can do in the short run to turn the trend around.

It was just last year that television executives were saying publicly that they weren’t sure the declining TV audience was real. Now there is no question. Raw subscriber and viewer numbers are declining at a rate of more than 1 percent per year. Television’s influence peaked around 2004, after which its growth was slower than the rate of population growth. Now there is talk of cord cutters getting their television programming over the Internet. What television executives won’t tell you is that more than half of people who cancel television subscriptions don’t replace them with anything. They canceled because they stopped watching.

The decline in ESPN is ultimately just the decline in television. Television will continue its decline, and we can only hope that the process can go smoothly, but there is plenty of potential for trouble along the way. The tension in the financial arrangements behind cable channels are stretched to the breaking point as it is, with cable channels regularly cutting off content to cable systems as a negotiating tactic.

So what could happen to ESPN? With its audience shrinking, it now knows it overpaid for its current bundle of live sports broadcast rights. It will have to bid less the next time around. Every other broadcaster too will have to set their sites lower when budgeting for content. The sports leagues and any other business that depends on television for the biggest part of revenue will have to make adjustments of their own.

Suppose, however, the situation is worse than it looks, and ESPN loses so many viewers next year that it reaches the point where it cannot meet its licensing payment obligations. Money already budgeted by major sports leagues, promised to players, stadium owners, bondholders, and the like, won’t be there to make those payments. Could there be a large-scale lockout? Could teams or leagues go bankrupt? Might some football, baseball, basketball, or hockey franchises simply shut down? Obviously, that scenario can be avoided. I would think all the worst effects can be avoided if the parties involved have already started the process of tightening their budgets to avoid a crunch down the road.

Saturday, October 29, 2016

The White House has taken a stand against the overuse of noncompetition agreements as a condition of employment. I think people may not realize how widespread noncompetition agreements are. Many businesses apply them to all employees regardless of whether the employee has access to sensitive information about the company’s processes and strategies. A noncompetition clause typically prevents a worker from taking a job with a direct competitor, but often they also prevent workers from taking jobs with the company’s clients, prospective clients, and competitors of clients and potential clients. In extreme cases they may extend to any company at all that hires workers to do the same kind of work or that has any customers in common. A single sentence in a noncompetition clause can make it virtually impossible for a worker to take a job in an entire industry. When you consider how many workers are covered by noncompetition agreements, roughly one fourth of all workers in the United States, they are a significant aggregate cause of unemployment. Workers who lose jobs may have to change careers and learn new skills before they can take a new job. The primary purpose of a noncompetition agreement is exactly what the exactly what the term suggests, to interfere with competition. However, they are also used to intimidate employees by making it harder for them for them to leave their jobs. Both purposes create problems for the economy as a whole, and so the rules surrounding noncompetition agreements ought to be more strict than they are.

Friday, October 28, 2016

Settled: Barclays and UBS settled with U.S. bond investors in a Libor rate rigging case, pending court approval. Terms were not disclosed.

Cuts:Monte dei Paschi will close 500 branches and eliminate 2,600 jobs. The bank’s stock rallied on the restructuring news, then crashed the next day and was briefly suspended from trading. The stock partially recovered and stabilized when trading resumed, but analysts expect this kind of extreme trading volatility to continue.

Large banks in general reported healthy profits from bond trading in the latest quarter.

Wednesday, October 26, 2016

Volkswagen will buy back diesel cars sold in the U.S. The settlement has court approval and the buybacks will begin in a few weeks. The cost of the settlement is described as $14.7 billion, and most of that is the cost of buying back cars. The settlement also allows for modifications to bring cars into compliance with air pollution standards, though to date no such repairs exist. The actual costs to Volkswagen could be less because it is hard to predict how many cars it will have to buy back. On the other hand, the settlement covers only vehicles with a 2-liter diesel engine. The less common 3-liter engine will likely be covered in a subsequent action at additional expense. It is surely the end of Volkswagen’s U.S. diesel offerings. The company has neither the engineering designs nor the credibility to sell diesel engines to the U.S. market. It will continue to sell cars with gasoline engines. At the same time, it will speed up its efforts to offer zero-emission vehicles. It has few alternatives. The past failings on emissions limit its ability to sell fuel-burning engines but shouldn’t affect the credibility of future zero-emission designs.

Tuesday, October 25, 2016

The distributed denial of service (DDoS) attack on Friday that slowed one corner of the Internet was a mystery at the time but is well understood a few days later. It was the work of a small (if unidentified) criminal group. The attack worked mainly by reprogramming Internet-connected devices. The heart of the attack botnet consisted of webcams made by Hangzhou Xiongmai Technology. Virtually all Internet devices made by this company were compromised.

The company is blaming a password problem, but there is a deeper issue. Devices like cameras should not be capable of being reprogrammed in this way. There is no need for a webcam to incorporate a general-purpose computer, but in particular, a webcam has no need for the ability to disguise its identity — an essential component of an effective DDoS.

In general, the proposed Internet of Things (IoT) will be possible only after these fundamental security issues can be sorted out. It doesn’t take much imagination to consider what a camera or microphone might do if it is capable of being reprogrammed over the network, but think beyond that. Reprogrammed lights could self-destruct in a relatively short time, leaving people in the dark. A coffee maker could be reprogrammed to explode and start a building fire, a danger that looms larger if you imagine this happening in a million apartments in the same city on the same night. A loudspeaker reprogrammed could plant subliminal suggestions — or it could make the loudest sound you can imagine, causing hearing loss and possibly even earthquake-like structural damage.

Excluding these unintended capabilities is simple enough in theory. It involves pulling out the general-purpose computer built into the devices, substituting a special-purpose controller that has an intentionally limited set of capabilities chosen with safety in mind. Yes, that requires more design work, but the current approach of relying on good programming practices, firewalls, and passwords clearly is not enough.

Friday, October 21, 2016

Cuts: Deutsche Bank is preparing more U.S. cuts but will maintain its Wall Street presence. HSBC will close its private bank in Monaco. The Wall Street Journal is offering a buyout package to all news employees worldwide and hopes to reduce staffing levels by about one sixth by next month.

Wells Fargo has lost its Better Business Bureau accreditation, the result of the bank’s $5 million ghost-account fraud against consumers and a surge in complaints in recent years. Meanwhile, the California attorney general is looking into allegations that the bank forged customer signatures.

Thursday, October 20, 2016

Christmas-season jobs may last for a shorter time this year. For a few years there was a trend for large companies to try to employ seasonal workers for nearly the entire fourth quarter. It rarely worked out that way, with work slowing in December and layoffs starting two weeks before Christmas. This time the largest seasonal employers plan to hire slightly more temporary workers, but for a shorter time. Many workers will have their jobs for only one month, from mid November to mid December. One reason for the shortened season is the worry that shoppers distracted by the presidential election may not start their Christmas shopping until November 11, the Friday after the election. The smaller number of jobs that last for a quarter will mostly be out of reach for walk-ons. Those positions will be reserved for workers returning from previous years.

Wednesday, October 19, 2016

Three months ago, Starbucks drew up a plan to pay its employees more while giving them more health care choices. The benefit changes went into effect this month, and Starbucks employees are now seeing the raises reflected in their paychecks.

I talked to several Starbucks workers, and not one is taking home more money. Everyone is getting less. Those who opt for traditional health coverage, now called “gold,” are paying around $5,000 a year, or about $200 out of each paycheck, to cover their share of the insurance premiums. It is a high price when you consider the size of a retail paycheck. Most employees, to save money, selected high-deductible plans. The premiums are similar to last year’s, but a plan year deductible around $2,000 means that, in a good year, insurance won’t cover anything. Employees are paying for all health care out of pocket. That’s hard to do, of course, so many have signed up for health savings accounts to cover the gap. That’s the main reason the paychecks are smaller. Setting aside just $1,000 per year of before-tax income means your take-home pay is $28 less. Recognizing the impact, Starbucks provided across-the-board raises — its first in seven years, apparently. The raises are large enough to take much of the sting out of the situation, but with actual paychecks smaller than before, workers did not come out feeling like they’d gotten a raise.

Starbucks said its youngest, healthiest workers — those whose annual medical costs are zero — might do better with the change, but no one I talked to knew of a worker who fit that pattern. Many Starbucks workers are relatively healthy and in their 20s, but nearly all, it seems, have a continuing medical condition that requires monitoring and a prescription drug. The picture of the young worker who never sees a doctor has become a myth, it seems.

Baristas may not have quit Starbucks all at once this month, but they’re not happy. These are the gist of the reactions I heard: “I just have to take better care of my health because I can’t afford to see a doctor anymore.” “I’ll have to get another job.” “I don’t see why we can’t form a union.”

This is unfamiliar territory for Starbucks, which a decade ago had possibly the most loyal work force in the retail space. A seven-year wage freeze followed by a drastic cut in benefits has changed that, and now Starbucks is lagging a sector where many employers are making plans for a $15 minimum wage. The company knows it has more adjustments ahead and is looking at more ways to automate its store operations so it can get by with fewer workers. It is also considering a plan to close many of its locations. One thing is clear: as the labor market tightens, Starbucks can’t continue to operate the way it has.

The problems Starbucks faces are an inevitable result of the public policy decisions to tie health coverage to employment. The unfortunate result is that health care has become the largest wage tax ever, while many of the supposedly covered employees are shut out of the system again. Starbucks and its workers might be the ones affected this month, but in time, every employer will face some version of the problem. I don’t believe there will be a solution without real health care reform, and that won’t be coming soon in the current political climate. Eventually, though, health coverage for medical conditions not resulting from workplace injuries will have to be separated from employment. The chronic troubles of the labor market and health coverage are hard enough to address separately. Keeping these two vexing problems chained together just makes matters worse. Every solution you can think of creates a new problem somewhere else.

Friday, October 14, 2016

Wells Fargo fired its CEO, but the move came with a surprisingly generous severance package. An insider was appointed as the new CEO. There are no signs of the bank adjusting its strategy or business model. Consumers are abandoning the troubled bank, with checking accounts declining the fastest. Nevertheless, the bank’s profit fell just 9 percent from the year before.

For years RBS systematically undermined its U.K. business customers according to a new report. In an intentional strategy, the bank abruptly raised interest rates on some 16,000 potentially vulnerable businesses in order to force them into restructuring. The bank would cut off credit, delay collecting deposits, or impose surprise fees to hurt a business’s cash position. Bank employees were paid bonuses for finding creative ways to squeeze a business. The bank then gained billions of pounds from restructuring fees while its customers, in many cases, went bankrupt.

Cuts: Deutsche Bank formalized its hiring freeze. It is said to be preparing to cut an additional 10,000 jobs and is looking for ways to accelerate its restructuring plans. Germany says it has ruled out any possibility of investing in the bank as part of a rescue package. Lloyd’s outlined 1,200 layoffs of its own. There are rumors of cuts at multiple banks in London and Singapore.

Arrested: The Singapore operations manager of Swiss bank Falcon Private Bank. Singapore has also revoked the bank’s license and started proceedings against former managers at the bank. The case involves money laundering of around $4 billion in funds connected to 1MDB.

Indicted: Brazil’s former president Lula da Silva and ten others face money laundering and conspiracy charges related to bribes used to arrange financing for an engineering company project in Angola. Prosecutors believe Lula was paid speaking fees for speeches he never delivered.

Settled:Monte dei Paschi will forfeit €10 million and pay a fine of €600,000 for false reporting of transactions and related crimes. The executives and managers involved are no longer with the bank.

Wednesday, October 12, 2016

When I looked at the world this morning, it seemed unexpectedly quiet after the turmoil and disaster of the preceding week. It was nice not to have a hurricane tearing the East Coast and not to discover a new political scandal or financial crisis that had popped up overnight. Peace must be in the gaps between the hurricanes.

But wait. Looking at the world from a slightly different angle, there was no gap between hurricanes. Hurricane Matthew had left so much rainfall in North Carolina that the rivers would not return to normal levels for a month. In some ways the flooding in eastern Canada, heavily influenced by the same hurricane, was worse. Cleanup in Haiti and Cuba had barely begun because of the difficulties of reaching the more remote areas. Some people might starve! At the same moment, Hurricane Nicole looked like it had a moderate chance of strengthening to the level of a major hurricane before a direct hit on Bermuda that would start tonight. Meanwhile the unraveling of one of the largest political parties in U.S. history seemed, if anything, to be accelerating, while new signs of financial trouble could be seen in Europe and the nearest parts of Asia. Where was the gap between disasters?

Yet I did feel peaceful in comparison to previous days. Peace is subjective, after all; it is where you are or where you can find it. And peace is a blessing even when the circumstances of the larger world don’t seem to substantiate the feeling. Any moment in which anyone finds peace is valid. In that moment and at that place it is not a fake or delusional peace, but the kind of peace that matters, the kind of peace that has the potential to expand and extend, to spread to other people and places. Perhaps I could say that peace occurs in the imaginary gaps between the hurricanes. That is not quite right either, because while the gaps might not be explainable in the larger view of the material world, peace is real wherever anyone finds it. When you are there, there is no need to justify the feeling of peace and certainly no need to debunk it. Rather, notice it and make use of it while it lasts — because that might not be very long.

Monday, October 10, 2016

It is a management rule so trite that even I am familiar with it: after you discover that you have created a problem for your customers, be very careful that you don’t make the problem bigger with your solution. Obviously, Samsung knows the importance of this, and they have just learned that they violated this rule with the Galaxy Note 7. When first issued a month ago, this much-anticipated phone exploded and caught fire more often than you would expect. After investigating, Samsung halted sales in one country, then worldwide. It asked consumers to return the phones for replacement, followed shortly by a formal product recall. Unfortunately, the replacement phones exploded and caught fire nearly as often as the originals. Problem not solved. Tonight Samsung is asking consumers using the Galaxy Note 7 to immediately turn it off and return it. It’s a drastic step for Samsung, but clearly better than leaving a potentially incendiary hand-held device in people’s hands. The lithium batteries in the phones did not explode often — only a few per day had this problem — but that is often enough that a consensus of people would agree that it’s more than the expected risk of using a consumer electronics device. As with the lottery, people tend to put more focus on the rare events that happen than on the ones that don’t. The man who burned his hands is unlikely to forget what phone did that. He might forget every other phone but not that one. No consumer product brand wants to be known as the product that blows up in your face regardless of the number of occurrences. Nor does Samsung want to be remembered as the smoking phone that delayed a flight from taking off, never mind that that has only happened once so far. Scrapping the Note 7 and going back to do more designing and testing is the right approach, and Samsung realizes it will have to do more than that to restore trust in its brand and operations.

Sunday, October 9, 2016

As predicted, I continue to be distracted by Post-Tropical Cyclone Matthew, with flooding rains continuing through the night affecting everyone I know in North Carolina. There, the floodwaters may not drain away completely for weeks. My own hurricane preparations turned out not to be needed. The rain and breezes weren’t much here in Pennsylvania and are winding down tonight but the storm’s combined impact on the mainland was a disaster pretty much in line with predictions. There is a coordinated effort by a few lunatics of the alt-right to discredit the hurricane despite at least 18 mainland deaths, miles of highway washed away, and early estimates of $6 billion in losses covered by insurance — and that is on top of the historic losses already suffered on the islands. Those who argue “almost no one” died are showing they lack an understanding of both human decency and the magnitude of the disaster.

There were indeed news releases in the news hole of late Friday during the hurricane, but they were not the kind I was expecting. In the first shocking report, a giant European bank revealed it has, in round numbers, $50 trillion in derivatives on its books. That’s a huge sum, equal to several years of euro zone GDP. The bank insists the situation is not so bad because, according to its internal analysis, the real risk exposure is “only” double the total value of the bank. I am confident this story will not get lost, but will be picked up tomorrow and discussed all week long and probably longer than that.

In the United States the bombshell was a TV interview from a few years back revealing that a presidential candidate aspires to sexual assault as a lifestyle. For this story too there is zero chance that it is lost in the shuffle. Indeed, the consensus among political observers is that this year’s presidential race is over as a result of the tape and the bungled response. As if to underscore that point, state polls released today show the race was already out of reach before Friday. The larger question now is whether the crisis will be the end of the political party involved. The United States has not lost a major political party in more than a century so this is a big question indeed. It would be impossible to lose sight of, no matter the timing of the news. Saturday Night Live, for its part, has ensured that the immediate political story gets the attention it deserves by making it the subject of an opening segment that is one for the history books. With much of the suspense taken out of the election, it doesn’t look like the remaining presidential debates can approach the record audience of the first one.

In each case, the news came out late Friday during a damaging hurricane accompanied by widespread power outages in the hope of minimizing the impact of the story. News editors cooperated initially by burying the lead, with headlines about accounting questions and choice of words, respectively. No doubt that effort was effective to some extent, but despite it all, the stories are out.

Friday, October 7, 2016

Cuts: Bailed-out banking giant ING announced plans to reduce its work force by 12 percent or 7,000 jobs. Half of the cuts are in Belgium and most of the rest are in the Netherlands. Workers in both countries announced strikes to protest the scale of the cuts. The bank says it will improve its digital presence and eliminate jobs through automation. Deutsche Bank has increased its ongoing job cuts in Germany by 1,000 after talks with labor authorities.

Settled: RBS will pay $1.1 billion to NCUA to settle claims related to mortgage-backed securities sold by RBS to two corporate credit unions. The securities were nearly worthless and the purchases contributed to the failure of both credit unions.

Indicted: A court in Milan, Italy, entered charges against executives and managers at Monte dei Paschi and Deutsche Bank along with a few traders at Nomura Holdings, for creating false transactions that boosted the value of Monte dei Paschi. The bank was forced to restate five years of financial statements after the falsifications came to light, and prosecutors spent three years investigating the transactions.

A flash crash in the British pound last night reduced the value of the currency by 9 percent for about one minute. The crash is far from fully explained, but it followed coordinated EU comments about exacting an unspecified “price” from the U.K. as retribution for the country‘s exit from the trading bloc. That is empty talk, as any such action would cost the EU more than the U.K. and no EU country or political body will be willing to fund such a program. Analysts say flash crashes are becoming more frequent and are not simply the result of program trading.

Wednesday, October 5, 2016

Early fall is the season for struggling summer attractions to close down, and this fall, the going-out-of-business list finally includes the Trump Taj Mahal casino in Atlantic City. It closes its doors Monday. In hindsight, the oversized casino would have done better to close in 2007 or 2008. Somehow it managed to defy gravity for eight years, drawing in new funding from a series of hapless investors, all the while losing money every non-summer week. In the end it was losing $1 million per week and the acrimony surrounding the closing just shows that there was no realistic prospect of keeping the casino going.

Losing money year after year is also the story at most of the few dozen golf courses closing at the end of the summer. Golf continues its slow fade, but often the problem is simply too many courses in the same place. A New York ski resort that added on two golf courses in a bid for summer visitors just decided that one was plenty. Resort, municipal, and university golf courses can lose money, but only up to a point. As participation declines, golf courses eventually have to close. That is the story in Jackson, Mississippi, where budget cuts forced the closing of the city golf course. Obviously, the city budget wouldn’t have been a factor if the course had drawn enough customers to cover its operating costs.

Tuesday, October 4, 2016

Another week brings another tropical system to watch in the western North Atlantic — but this time it’s serious. Hurricane Matthew is surely already causing severe flooding and other damage in Haiti and Cuba, with the Bahamas to follow. After that, there is a chance that it could paint the U.S. coastline with a week of heavy rain from Florida to Massachusetts.

You hardly ever see a hurricane track parallel to the coast for such a long distance, but Matthew is a threat to do that. Currently there is a hurricane warning in Florida, but people in ten states should be getting ready or at least keeping track.

Even before the storm arrives, the approaching danger poses a distraction. For the next week or longer, fewer people will be paying attention to the presidential election, the new fall TV season, holiday-season hiring, and other major current initiatives. Conversely, companies may release bad news on Friday afternoon in the middle of the storm in the hope that their troubles don’t get so much attention.

If the major river and coastal flooding materializes as forecast in 8 or more states, that will be an economic setback on a national scale. The damage and inconvenience would be large enough, for example, to skew the 4th-quarter GDP numbers.

Sunday, October 2, 2016

One reason to be skeptical of electric vehicles is that no one has any history of making them in large numbers. Now, though, Tesla Motors is close to laying that concern to rest. Tesla recently passed the rate of 100,000 units per year. Just as important, in a few more weeks the automaker may have more than a week of inventory. It will be the first time in its history that Tesla will have vehicles in stock. Previously, Tesla had long delays in delivering orders. The delays and accompanying uncertainty made most potential customers hesitate.

Batteries are the one remaining obstacle. For electric cars to be more than a niche product at the current price of gasoline, the price and durability of batteries will have to improve by another notch or two. That seems inevitable, though it’s always hard to predict the timing of breakthroughs in materials engineering. As the manufacturing cost of batteries falls, the demand for electric cars will increase. Though there will surely be periods of shortages as component supplies get out of sync, the electric car sector looks ready to expand to meet the growing demand.